An overstatement of closing merchandise inventory in the current period leads in an underestimate of net profits in the current quarter. The answer is true
What effect would an overstatement of inventories have on liabilities?
- Because net income is directly tied to cost of goods sold, overstating ending inventory will result in an overstatement of net income.
- To determine income, deduct the cost of products sold from the revenue.
- Since we may assume that the initial inventory and purchases are the same, the change will affect the cost of goods sold.
- Because inventory and cost of goods sold are inversely connected, if inventory is exaggerated, the cost of goods sold is underestimated.
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